By Kunal Bose who recently visited Vietnam
KOLKATA: South-east Asian countries led by Vietnam and India for hi-tech industries and Sri Lanka for the more traditional kind like clothing are engaged in a competition to be recipient of foreign funded capacity being decoupled from China by a growing number of MNCs headquartered mainly in the US and Japan but also in European Union. Capacity and investment migration from the world’s second largest economy which catapulted itself as factory to the globe based on low labour cost and a strong business ecosystem lasting many years was launched in 2013 at the US initiative in 2013 with other countries embracing the strategy of China plus one strategy as years rolled on.
By the time, the strategy to diversify supply chain and manufacturing activities from China gained traction to mitigate risk of supply disruptions, that country had already put in place an ecosystem of networked suppliers, component manufacturers and distributors that the world could not do without. However much the MNCs may want and however investment welcoming other Asian countries, including India may be, they acknowledge that they cannot simply wholesale exit China. At the same time, they have opted for making things elsewhere too both as a hedge against supply disruptions from China and to give a message to Beijing that attempts will continue to develop suppliers outside China.
But by the time, the MNCs started pursuing the strategy of China+1, suppliers of final products and components makers all using very high technologies in China have moved into such an unassailable position that the MNCs, whatever be their desperation cannot do without them in the foreseeable future. This correspondent has recently found during a recent visit to Ho Chi Minh City (previously Saigon) where a good number of foreign companies have their head offices that Vietnam based suppliers to MNCs have a significant dependence on Chinese components suppliers. Why only Vietnam, new suppliers based in other Asian countries, including India will be hugely handicapped if they don’t get regular supplies of components from China.
Here remains a challenge and also an opportunity for suppliers outside China and also the host governments to promote capacity building for components making. At least in the case of Vietnam, some Chinese components makers have built manufacturing units there for the benefit of suppliers of finished products and also to protect their commercial interest. Helped largely by investments in information technology (IT) and high-end electronics ventures, Vietnam, according to CLSA, a global house for corporate finance and asset management, received in the first three quarters of 2023 foreign direct investment (FDI), which as a share of GDP was twice as large as in Indonesia, the Philippines or Thailand.FDI for Vietnam took a leap of 32.1 per cent to $36.6 billion in 2023. India, a many times bigger economy than Vietnam and fancied by foreign companies and funds, however, found FDI slipping 16 per cent to $70.9 billion in 2022-23 from $84.84 billion in the previous year.
Why are foreign companies descending on Vietnam in good numbers with significant investment and a rich repertoire of technologies? What continues to help the country, which first won independence from France in September 1945 and then engineered the fall of Saigon and take control in April 1975, is it remaining in the demographic window of opportunity when the proportion of population of working age, especially the ones between 25 and 39 has reached its maximum. Not only that, people there joining the workforce are better educated and skilled than in countries in competition with Vietnam for FDI.
A World Bank survey, for example, says on learning scores, Vietnamese students are ahead of their counterparts in developed countries such as the UK and Canada, not to speak of south-east Asian nations. The tone for good school education was set by Ho Chi Minh himself who would say “for the sake of benefit for ten years, planting trees is a must. But for the sake of benefit for a century, we must cultivate the people.” As is expected to be the case with a communist regime, Vietnam has looked after the health and education of students in a way that they have become a good resource for economic development.
No wonder the rich Vietnamese human resource has come for good use by suppliers engaged in making high value products for Apple, Samsung and many others. Moreover, workers there are available at almost half the cost of their counterparts in China’s coastal regions. Manufacturing wages in Vietnam remain the lowest in the entire south-east Asia barring the Philippines. A challenge in the long term for Hanoi will be the greying of the country and then also at a fast pace. A fairly recent demographic survey says working age population in Vietnam will shrink after 2038.
Though a communist country with China as a neighbour in the north, the overwhelming majority of Vietnamese, according to a survey, are favourably inclined to the US and at the same time bear strong reservations about China. That is how the two superpowers are viewed by the public in Vietnam but Hanoi has placed itself so very well between the US and China that both remain well disposed to the south-east Asian country. Incidentally, Vietnam was the only country that hosted President Biden and Xi Jinping last year. The upgrading of Vietnam’s relations with the US to a “comprehensive strategic partnership” in September has an important bearing for the latter since it is now in the same place as China and Russia vis a vis Hanoi. As is always the case, congenial diplomatic relations are also a precursor to investment flows. Vietnamese experience once again proves the rule.
From among world leader FMCG companies Unilever to Nestle to Procter Gamble to IT giants such as Microsoft and IBM to a good number of leading electronics groups from Japan and South Korea have all settled down well in Vietnam and remained in expansion mode. Apple has found in Vietnam the right place to progressively procure its high-end products, be it phones, notepads and laptops from a select group of suppliers. In the meantime, the local Vietnamese demand for Apple products has shot up following the opening of online Apple store and back up service from online team.
Let the compulsions for Western countries and Japan to vigorously pursue China+1 policy be understood: First, geopolitical tensions leading up to President Xi Jinping giving instructions to his military to be prepared to move into Taiwan by 2027 and President Biden’s resolve to thwart any such Chinese ambition. Second, growing strains in trade relations finding expression in Western countries and also India hauling China to World Trade Organisation (WTO) for dumping. Third, the discomfort caused by arbitrary policies, which became starkly evident during Covid-19 pandemic management. Fourth, Beijing proclaimed greatly worrying data privacy law. (IPA Service)
**The writer is the former Editor of The Economic Times, Kolkata